ECONOMYNEXT – Sri Lanka state salary bill as a share of taxes has fallen to 55 percent of taxes in the first four months of 2023, from 72 percent last year, official data shows.
Sri Lanka collected taxes of 742.5 billion rupees up to April 2023 and the salary and wage bill was 303.3 billion rupees. Pensions were a further 105.9 billion rupees.
“Expenditure on salaries and wages of public servants decreased by 4.0 percent due to the retirement of large number of public servants at the end of 2022 while due to the same reason, expenditure on pension payment increased by 6.3 percent,” the finance ministry said in a report.
Sri Lanka’s state salary bill started to go up steeply from 2015 under so-called ‘revenue based fiscal consolidation’ where ‘spending based consolidation’ (cost-cutting) was abandoned.
As a result, while tax collections went up, spending also went up from around 17 percent of GDP to around 20 percent of GDP and deficits were not controlled.
A key cost item is also the interest bill. Sri Lanka has high interest rates due to monetary instability coming from output gap targeting and flexible monetary policy.
Sri Lanka from 2015 also started to target an output gap by printing money after the IMF taught the trigger happy agency to calculate potential output, blowing the balance of payments apart. Stabilization measures were imposed triggering higher interest rates and growth shocks.
In 2020 extreme ‘macro-economic policy’ was deployed adding tax cuts to money printing (rate cuts with inflationary open market operations).
Strict spending based consolidation has been operated in the last two years under President Ranil Wickremesinghe and Treasury Secretary Mahinda Siriwardana in addition to tax increases (revenue based fiscal consolidation).
A part of the correction is coming from inflation and currency depreciation, and nominal salaries will eventually go up. To have lasting corrections Sri Lanka’s state has to be be allowed to trim down, including the military, analysts say.
One of the assumptions behind the ‘revenue based fiscal consolidation’, a cookie cutter solution advocated by the International Monetary Fund, is that spending around 20 percent is perfectly fine for a ‘developing country’ and no effort is made to cut costs.
Classical economists had pointed out that in a democracy, revenue based fiscal consolidation is a nonsensical concept.
“Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government,” economist B R Shenoy told Sri Lanka in a report commissioned by ex-President J R Jayewardene in 1966 when revenue was already above 20 percent of GDP.
“When Revenues increase, under the weight of these pressures, expenditures too increase to meet, or
even exceed, revenue collections.
“In Ceylon during the past seven years revenues rose by 45 per cent and Expenditures charged to Revenues by 48 per cent.
“There is a real danger that any programme for increased Revenue collections may be attended by a corresponding increase in the consumption expenditures of the government, and little may be left of the additional revenues to cover Budget deficits.”
Sri Lanka’s was was taking 20 percent of revenue, undermining private savings and investment, which was much higher than Germany (13.7-pct) and Japan which 13.9-pct at the time, Shenoy pointed out.
At the time also Sri Lanka was beset with forex shortages and import controls/import substitution due to central bank money printing to suppress rates.
Shenoy advocated a single anchor monetary regime (a floating rate) saying devaluations of soft-pegs were hit or miss, in an unusually advanced remedy before developed nations floated in 1971.
In 2023 Sri Lanka legalized another dual anchor conflicting regime called a ‘flexible exchange rate’ which is neither clean float nor a hard peg. As a lasting solution to the country’s monetary problems analysts have advocated taking away the central bank’s powers to deploy macroeconomic policy. (Colombo/Sept21/2023)